No. 11: The Netflix meltdown -- a cautionary tale for the Internet age

More than any year I can remember, this one produced the most "are you kidding?" tech news stories.

One minute you're waiting for another stellar Google earnings announcement, the next you're picking up your jaw off the floor because CEO Eric Schmidt is stepping down and being replaced by co-founder Larry Page.

Or the CEO of the world's largest PC maker suddenly announces the company plans to get out of the computer business, a controversial shift in strategy that leads to his ouster weeks later.

Behind most of the dramatic headlines were larger stories, stories of trends and emerging technologies that will continue to shape our lives, for better or worse. I looked back at this year's stories and selected the ones I thought were most significant in some unspecified way that I refuse to divulge for fear of reader second-guessing and ridicule. And because I'm drunk with power.

On a more generous note, while most year-end lists include 10 items, this one goes to 11. I'll post them individually between now and New Year's Eve. Your excitement is palpable.

So let's get things going with No. 11, a little story I like to call:

Netflix's Public Suicide Art Project

No doubt, streaming video provider Netflix entered 2010 dogged with growing questions, primarily regarding 1) its high stock price 2) the anticipated increase in content costs as contracts with entertainment corporations expired, and 3) the likely entrance of major companies into the streaming market.

Even as giants such as Amazon and Facebook announced deals allowing them to stream video content to members, shares of Netflix (NASDAQ: NFLX) shook off the hits and kept rising, topping $300 for the first time in mid-July.

And then all hell broke loose. On July 12, the company said it would raise its rates 60% and offer subscribers separate DVD and streaming packages.

The blowback was immediate and fierce, as outraged customers expressed their sense of betrayal by dropping the service, causing Netflix to revise quarterly projections in mid-September, with analysts following suit.

By late September, Netflix shares were trading for less than half of their $304.79 high set less than 10 weeks before.

Through it all, Netflix refused to budge on its price hike. In fact, it doubled down on September 18, as Hastings tried to sneak another customer-antagonizing decision inside the Trojan horse of an insincere apology for the rate increase. And thus already pissed customers learned that Netflix would spin off its DVD-by-mail service and rename it "Qwikster."

The competitive challenges surrounding Netflix at the beginning of the year were real, if not manageable. Netflix's blunders since July have made these challenges potentially fatal because the company has severely damaged its brand. The damage comes in the form of customer feelings of betrayal, and those may be impossible to overcome.

And that's the lesson for Internet companies with a loose grip on customers: If you antagonize them, they'll simply leave. Ask Digg and Myspace how that goes.

Bottom line: The question I asked almost exactly a year ago today -- Has Netflix Peaked? -- appears to have been answered. The questions for 2012 are: Has Netflix Hit Bottom? and Will Netflix Survive?